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23 December 2015

UK Treasury annuity consultation

As part of the UK Government's ongoing pension reforms, the Treasury launched a three month consultation process in March 2015, inviting industry feedback on how a secondary market in UK annuities could operate in the best interests of consumers and secondary investors alike.

This would provide an estimated five million UK pensioners with the choice to sell their existing annuity in a newly created open market; which SL estimates could see initial trading in excess of £500 million a year.

The original intention of the Government was to launch the secondary market in April 2016.

However, three weeks after the close of the consultation process on 18 June 2015, the UK Chancellor of the Exchequer, George Osborne, announced in his Summer budget 2015 that implementation of the secondary annuity market should be delayed until 2017, "to ensure there is an in-depth package to support consumers in making their decision".

Since then the UK Treasury has been busy digesting the industry responses to the consultation, and meeting with key market stakeholders to bring together a set of recommendations to the UK Government on how the market should operate. Their response to the call for evidence was published on 15 December 2015.

SL Investment Management (SL) has fully engaged in the process by providing a full written response to the questions raised in the consultation. Further, SL has actively participated in a subsequent series of meetings with the UK Treasury, the Financial Conduct Authority and the Association of British Insurers throughout the autumn.

Alec Taylor of SL commented, "SL has pioneered the UK Traded Endowment Policy (TEP) market since 1990 and we have over 12 years' trading experience in the US Life Settlement market. As such, we bring a somewhat unique perspective to discussions on the creation of a secondary UK annuity market and how the market may ultimately operate in practice."

Highlights from the Treasury publication on 15 December are:

  1. Annuity providers will be permitted to buy back their own annuities. However, they will need to do this as part of a blind bidding process.

  2. Retail investors will not be permitted to buy individual annuities direct in any form, whether through a secondary or tertiary market. However, it is unclear whether retail investors will be able to participate via structures such as Collective Investment Schemes.

  3. In the UK, only FCA regulated entities will be permitted to buy annuities on the secondary market. However, the transaction will need to be performed via a suitably regulated intermediary.

  4. Partial sale of annuities will be discouraged by classifying them as an 'unauthorised payment' under tax legislation. However, the Government may review this arrangement in the future.

  5. Annuity providers will be allowed to make an administration charge to cover the costs associated with a transaction. However, the FCA will look to put rules in place to ensure these remain reasonable.

  6. The Government plan to expand the Pension Wise service to support consumers; and independent advice will be mandatory for the sale of annuities above a certain threshold. However, the threshold amount is yet to be determined.

  7. Annuity providers will not be required to provide 'benchmark values' to annuitants. However, the government are working with the FCA to create an online benchmarking tool for consumers.

Alec Taylor continued, "There are some positive elements for consumers outlined in the Treasury response, particularly in relation to the distance placed between annuity providers and their own book of annuitants."

"This is important. Our experience of the UK TEP market shows that consumers continue to be generally unaware of the secondary market option. Those looking to cancel their contracts early are frequently surrendering their policies back to the issuing life office for a price lower than they could achieve on the secondary market."

"It is good news that the Treasury appear to have acknowledged this, putting a degree of consumer protection in place. However, there needs to be further clarification from the FCA regarding the role of the intermediary in the transaction and we look forward to engaging in their secondary annuity consultation process that should commence early 2016."

"Further, there are market elements such as the death notification process, protection for beneficiaries, the impact on annuitants in receipt of means tested benefits that have been acknowledged, but remain unresolved. As they say, 'the devil is in the detail'."

For further information on the latest developments in the creation of a UK secondary annuity market please contact Alec Taylor.